KE Holdings Inc.
Q1 2023 Earnings Call Transcript

Published: 18 May 2023

[Operator:]

Hello ladies and gentlemen. Thank you for standing by for KE Holdings Inc’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I would now like to turn the call over to your host, Ms. Siting Li, IR Director of the Company. Please go ahead, Siting.

[Siting Li:]

Thank you, Operator. Good evening and good morning, everyone. Welcome to KE Holdings or Beike’s first quarter 2023 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted on the company’s IR website, investors.ke.com. On today’s call, we have Mr. Stanley Peng, our Co-Founder, Chairman and Chief Executive Officer, and Mr. Tao Xu, our Executive Director and Chief Financial Officer. Mr. Peng will provide an overview of our strategies and business developments, and Mr. Xu will provide additional details on the company’s financial results. Before we continue, I refer you to our Safe Harbor statements in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that Beike’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the company’s press release which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in RMB. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.

[Stanley Peng:]

Thank you, Siting. Hello, everyone. Thank you for joining Beike’s first quarter 2023 earnings conference call. During the past quarter, we have witnessed the real estate market in China, along with various other industries, rebounding from the pandemic. GTV of existing home sales in China increased by 51%, while GTV on new residential home sales increased by 7%, with sales of the top 100 developers growing by 2%, all on a year-over-year basis. Existing home transactions GTV on our platform increased by 78% year-over-year in the first quarter, and our new home sales GTV increased by 44% year-over-year in the first quarter, outperforming the industry by a great extent. In the past few years, aimed the tremendous volatility in the market, our continued investment in our ACN network and infrastructure, our persistent support for quality service providers and our efforts to shift towards higher quality, more efficient development, have enabled our outstanding performance during the market recovery process. As the external market gradually stabilizes and our organization gets stronger, we face people’s questions such as

[Tao Xu:]

Thank you, Stanley. Thank you everyone for joining us. Before going into the detail of our first quarter financial results, I would like to provide a brief update on housing market in the first quarter. Since the beginning of this year, the real estate market has staged a significant recovery, bolstered by a favorable policy of “preventing risks and supporting demand”, coupled with the concentrated release of pent-up housing demand from the pandemic. Notably, the existing home market saw a strong pick-up with housing prices beginning to narrow their year-over-year decline and showed a return to quarter-over-quarter increase from the sequential decline in previous periods. The new home market also experienced a moderate recovery with the consumer confidence improving. As effects of the one-off release of pent-up demand and the seasonality wore off, starting in March, market transaction volume began to normalize from an excessively high level. Benefiting from relatively stable scale of our ACN network during the market’s protracted slump and the effective promotion of refined operations for stores and agents, we proactively capitalized the market recovery tailwinds and the seasonal dividend as the market rebounded at the beginning of the year. As a result, our GTV growth significantly outperformed the market. According to Beike Research Institute, in first quarter, GTV of existing new home sales in China increased by 51.2% year-over-year, while the existing home transaction GTV on Beike platform grew by 77.6% year-over-year. Data from National Bureau of Statistics also showed that the GTV of the new home sales in China increased by 7.1% year-over-year, while the new home transaction GTV on Beike platform rose by 44.2% year-over-year. Our net revenue in the first quarter reached RMB 20.3 billion, representing a 61.6% increase year-over-year, beating both the high-end of our guidance and the street consensus. The increase was driven by our highly efficient operations, stable monetization capability and organic growth in our home renovation and furnishing services. Our gains were further bolstered by the better-than-expected market recovery. Moreover, in the difficult environment since the second half of 2021, we implemented the staunch cost and the expense optimizations and consistently refined our operations, which made our organization more efficient and agile. Those effort empowers us to deliver strong performance in profitability during the market downturn. They have also allowed us to start this year in a position of the strength, gaining great benefit from our increased operating leverage. Therefore, we reported continued improvement in multiple financial metrics. Our Q1 gross margin was at 31.3%. GAAP net income reached RMB 2,750 million, while non-GAAP net income jumped to RMB 3,561 million in the quarter, compared with RMB 28 million in the same period of 2022, and an increase of 137% compared from the first quarter of 2021 with a similar revenue scale. By segment, our net revenue from existing home transaction services increased by 49.3% year-over-year to RMB 9.2 billion in Q1, primarily driven by a 77.6% increase in GTV. Among that, existing home transaction GTV from Lianjia rose by 43.2%, of which the revenue was recorded on a gross basis, while GTV by connected agents jumped by 117.9% year-over-year in Q1, fueled by the notable property market recovery in many Tier-2 cities, of which the revenue was recorded on a net basis, resulting in the slight smaller growth of the existing home revenue compared to GTV. Our net revenue from the new home transaction services increased by 42.2% year-over-year to RMB 8.4 billion in Q1, thanks to our outstanding sell-through capability, vast customer base from the existing home transaction and the operation integration of the new home and existing home business, faster new home settlement by Lianjia, and the targeted market coverage in first- and second-Tier cities that were first to recover at the beginning of the year. Particularly, cooperation with the state-owned developers account for 46% of our sales revenues. Benefiting from the effective coordination with home transaction services, the contracted sales of our home renovation and furnishing business totaled RMB 2.7 billion, up 108.2% year-over-year and the revenue amounted to RMB 1.4 billion, rising by 54.3% year-over-year both on pro-forma basis. Our net revenue from emerging and other services increased by 222.1% year-over-year to RMB 1.3 billion in Q1, primarily attributable to the increase of net revenues from rental property management services and financial services. Our most streamlined cost and expense structure has led to a significant increase in single quarter profitability amid the substantial recovery of the market. In particular, the contribution margin of existing home business jumped to 49.0% in Q1, up by 11.3 percentage points from the same period in 2022 and 11.9 percentage points from Q4, benefiting from the notable revenue increase, the year-on-year decrease in the fixed costs, and a relatively stable variable cost ratio. The contribution margin of the new home transaction services reached 27.0%, up by 8.8 percentage points from the same period of 2022, mainly driven by the increased percentage of the high-profitability projects and the more streamlined personnel structure. Therefore, driven by the higher margins from the existing and the new home business, increased proportion of home renovation and furnishing services with a higher margin, as well as a smaller percentage of the cost reached to store and other cost of the net revenues, gross profit increased by 186.1% to RMB 6.3 billion in Q1. Gross margin increased to 31.3% in Q1 from 17.7% in the same period of 2022. Our GAAP operating expenses increased by 7.5% year-over-year to RMB 3.4 billion. Among that, sales and marketing expenses increased by 50.3% to RMB 1,294 million, mainly due to the consolidation of Shengdu and the organic growth of home renovation and furnishing services. General and administrative expenses increased by 6.1% to RMB 1,621 million, mainly due to the increase of the share-based compensation expenses. Notably, with the healthy cash collection of the new home business, we have a bad debt provision written-back of RMB 127 million in Q1. Research and development expenses decreased by 39.0% to RMB 457 million, mainly due to the decrease of the personnel cost and SBC as a result of the decreased highcount. While maintaining our investments in the new business, including the home renovation and furnishing, our total non-GAAP expenses in Q1 was at RMB 2.61 billion, representing a notable decrease both year-on-year and quarter-on-quarter. Income from operations was RMB 2,987 million in Q1, compared to loss from operations of RMB 918 million in Q1 2022. The increase in gross margin and improved operating leverage have brought about the increase in operating margin to 14.7% in Q1 from negative 7.3% in the same period of 2022. Our non-GAAP income from operations was RMB 3,830 million in Q1, compared to non-GAAP loss from operations of RMB 450 million in the same period of 2022. Non-GAAP operating margin increased to 18.9% compared to negative 3.6% in the same period of 2022. Q1 net income was RMB 2,750 million, compared to net loss of RMB 620 million in the same period of 2022, and a net income of RMB 1,059 million in Q1 2021. Non-GAAP net income was RMB 3,561 million in Q1, compared to RMB 28 million in the same period of 2022. Our cash position and cash flow remained robust. As of end-March 2023, on the basis of one-time payment of bonus before the Spring Festival. The combined balance of our cash, cash-like items totaled RMB 85.3 billion, or $12.4 billion, up by RMB 7 billion from the end-December and RMB16.2 billion from the end of Q1 2022. Among which the combined balance of our cash, cash equivalents, restricted cash and short-term investments was RMB 66.6 billion. The balance of our long-term cash-like items, mainly included in the long-term investments amounted to RMB 18.7 billion. Our net operating cash inflow was RMB 7.6 billion in Q1, remaining positive for the 6th quarter in a row. Under our stringent receivable management, our cash collection from the new home business has exceeded new home revenue for 7 quarters in a row, totaling RMB 8.34 billion in Q1. New home DSO was at only 59 days in Q1, further shortening by 5 days from Q4, and 93 days from the same period of 2022. Turning to the guidance of the second quarter of 2023. We expect total net revenues to be between RMB 18.5 billion and RMB 19.0 billion in Q2, representing an increase of approximately 34.3% to 37.9% from the same period of 2022. This forecast considers of potential impact of the recent real estate-related policies and the macro economy recovery status. It constitutes the current and preliminary view of our business situation and the market conditions, which are subject to change. The past 3 quarters represents three distinct market conditions. In the third quarter of 2022, the market was on the path of the recovery, despite the impact of the unusually hot summer, recurring pandemic outbreak in sporadic cities, and the financial strains in the new home market. Based on historical trends, we believe the market has returned to 80% of its normalized level and we recorded a Non-GAAP net income of RMB 1,888 million during the quarter. The fourth quarter of 2022, nevertheless, was extremely difficult. The market was hit hard by the home buyers’ low purchase intentions, and the widespread pandemic outbreaks across the country. Facing these formidable challenges, we demonstrated resilient profitability with a Non-GAAP net income of RMB 1,547 million. Moving to the first quarter of 2023, the market become excessively heated driven by the 3 factors

[Operator:]

[Operator Instructions] If you’re going to ask the question in Chinese please follow with the English translation. Today’s first question comes from Harry Chen with Citigroup. Please go ahead.

[Harry Chen:]

This is Harry Chen from Citigroup. So thank you management for the opportunity and first of all, I want to congratulate on extremely solid results in the first quarter. So my question is regarding the general housing market. We see that as a housing market was in great shape in the first quarter of this year. Have there been any structural changing in the market? And a series of leading indicators since March seem to show both the existing and the new home markets are relatively soft. What are the company’s observations of the latest market conditions and how to interpret this leading indicator? What’s the company’s view about the future trends of the existing and the new home market and how will the market performance differ among different CPPs? Thank you.

[Tao Xu:]

Regarding your first question, in the first quarter, the release of pent-up home transaction demand, along with the support of easing policies, contributed to a significant rebound in China’s existing and the new home market, followed by a normalization of the market. Overall, the China housing market experienced moderate recovery, with new characteristics including

[Harry Chen:]

Thank you, management.

[Operator:]

Thank you. And our next question today comes from Eddy Wong with Morgan Stanley. Please go ahead.

[Eddy Wong:]

Thank you, management for taking my question and congratulations on the very great results. So, my question is that Beike has significantly outperformed the market across different business lines in the first quarter. Could you please share how the company achieved this very strong results and performance, and how should we think about your performance relative to the overall market going forward? Thank you.

[Tao Xu:]

Thank you, Eddy. In first quarter, our company significantly outperformed the market across all of our business lines. Our GTV of existing home sales increased by 78% year-over-year in the first quarter compared with the market’s growth of 51%. And our market penetration rate increased by 6.6% quarter-over-quarter. And our GTV for new home sales increased by 44% year-over-year, compared with the market’s 7% increase, and our penetration rate increased by 1% quarter-over-quarter. Firstly, we need to oversize this our significant show-run outperformance, which is similar to what happened in 2 years ago. That is the second quarter of 2020 following the pandemic outbreak, and the way we expect a return to normal in this year as well. In Q2 2020, our market penetration of existing and the new home increased by 6% and 2%, respectively, both quarter-over-quarter. In the third quarter, as the market has normalized, our market gain has also returned to 1% increase quarter-over-quarter. Meanwhile, the difference in the sales recognition may also be one of the reasons why our data significantly exceeds market. The existing home market data is based on the online registrations when transactions are closed, while our data is based on the contract signing, which leads to the online closing date by around hald-a-month to one month. Excluding the above factors, our first quarter performance also demonstrate our strong ability to capture the market opportunities during the recovery cycle. Firstly, we supported and retained the high-quality service providers during the market downturn, which has enabled us to reap the benefit of the market economy. Our view on the future market is that those who can attract the existing and the high-quality service providers will be the ultimate winner. In the first quarter, we took advantage of the recruiting season and the exit of many other players in the industry to grow our coverage of existing stores and agents. As a consequence of this, we ended the 5 and the 6 consecutive quarter of decline in the number of stores in the agents, respectively. Our number of active stores increased by around 6% quarter-over-quarter to over 39,600, and the number of our active agents increased by as much as 18% quarter-over-quarter, crossing the number of agencies from 410,000 mark. Secondly, our service provider did not lie idle during the market downturn. They continued to improve our professional skills and the conducted to community-friendly services during the pandemic, which earned them into long-term trust of the current and potential customers. As the market recovers, those better-known professionals become customers’ go-tos. In two-year period of 2021 to 2022, 4,600 store owners completed courses in our Beike Huaqiao Academy, while agents on our platform completed over 24 million hours of professional training through various online and offline courses. Investments in enhancing the capability and accelerating the growth of both agents and the store owners will yield benefits that transcend the market segment. We also iterate and refined our business operation strategy. Before 2022, we focused more on growing our number of store agents. Beginning this year, we will limit a number of new stores and agents. leveraging our analysis of the different business districts, only allow the new addition in non-saturated areas. Meanwhile, we will identify the problem in different areas and operate in a profitable manner to better support and empower store owners and the agents. Our capabilities in this existing home market enable us to succeed in the new home market. More than 50% of our new home customers come from this existing home market. Our proficiency in existing home sales support our ability to better seize the business opportunities as the new home market recovers. In cities, where we hold advantage in the existing homes, we can expand our reach more significantly in the new home market. For example, in the first quarter, our new home sales market penetration in the cities such as Wuhan increased by more than 5% quarter-over-quarter. Finally, in the house ecosystem, in both existing home and new home markets will help establish a virtual business cycle, naturally leading to a sustained market penetration gains. Regarding our home renovation and financial services, the overall renovation market rebounded in the first quarter along with the real estate market. The contract sales of the Beike home renovation and furniture services grew by 108% year-over-year on a pro forma basis. In particular, referrals from our core business contributed to over 40% of total contract sales. Leading cities such as Beijing have been witnessing a continuous improvement in the single city operational ability, with an increase in the volume of the renovation orders surpassing that of the existing home transactions, setting the new record of market possibility along with emerging cities gradually gaining momentum, contributing more to our performance. In summary, while our market penetration will be normalized in the short-term, in the long run, we will consistently expand our reach to wider residential services, which provide ample for growth with high certainty. Thank you.

[Eddy Wong:]

Thank you, Tao Xu, and congratulations on the results again.

[Tao Xu:]

Thank you.

[Operator:]

Thank you. And our next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

[Timothy Zhao:]

Hi, Stanley, Tao Xu and team. Thank you for taking my question and congrats on the very strong results. My question is about the efficiency improvement, as you mentioned in your remarks. And just wondering if management see any opportunities for further efficiency improvement after very strong Q1 results, and how do you plan to achieve them? And additionally, are there any specific measures that management have in their mind for this year to further improve the quality of the services to customers? Thank you.

[Stanley Peng:]

Okay. Regarding efficiency improvements, we have already mentioned some idesa in our prepared remarks. The key to focus on customer experience and enhanced capabilities of stores and agents, while improving our platform ecosystem and mechanisms. We have implemented many initiatives to greatly enhance the customer experience over the past 20 years. This has helped us to win customer’s trust and become a top choice for both customers and service providers through initiatives such as transparent pricing, authentic listing, and housing dictionary. And our commitment to the protection of secure transactions through these efforts, we have addressed many key pain-points that customers face on the transaction side, and significantly improve the industry ecosystem as well as efficiency. As the market supply and demand gradually balance, pain points of owners become increasingly prominent. Their needs have undergone changes and ability to better meet these needs will be an important direction for enhancing customer experience in the next stage. Furthermore, this year, we will iterate our commitment system for housing transaction services, by enhancing the overall customer experience by addressing core pain points. At the end of 2022, our platform offered 56 service commitments to customers in our housing transaction services. The fulfillment of this commitment is far more important than their quantity. Therefore, we will prioritize our commitments to address our customers’ most relevant pain points and promote a high-quality management of our service commitments. Firstly, we will focus on more targeted brand level service commitments. Secondly, we will steadfastly improve the quality and the fulfillment of commitments that will cover key customers’ painpoints,such as compensation for damage caused by water leakage. Thirdly, we will provide commitment -- guarantees to both end customers and our business partners. For our home renovation and furnishing business, the key to success lies not in customers’ acquisition of our marketing, but in the quality of delivering, fulfilling commitments even more important and simply making promise. To address key pain points of our renovation services, we must set clear fulfillment, standards and responsibilities, enhance our fulfillment capabilities, and tackle industry-wide challenges. This is the next breakthrough that we are targeting. Meanwhile, the pain points for our core business customers arise more from the housing product side. For the transaction side, the key drivers for improving efficiency, lies with helping high-performance agents do better and earn more, and provided them with a clear career path to become experts in community and housing relative services. Only in doing so, the customer receive professional, quality, bespoke and diversified housing and related services. On efficiency enhancement for the long-term, we have put tremendous effort. First, the average income of agents in our industry still lags far behind the average wage in our society. Only when agents have a healthy income can maintain a long-term career, and achieve higher productivity. We establish and continue to healthy ecosystem and a competitive mechanism avoids cutthroat and inefficient competition. By providing long-term, high-performance practitioners with more resources and improving their income, we can retain them in the industry. This can be achieved through platform system refinement, adequate ACN network coverage, efficient cooperation, professional training for store owners and agents, as well as by adopting the cost-effective large store model. Secondly, technological advancements such as AIGC continue to present opportunities for service providers to improve their efficiency, exploring and effectively utilizing these products and tools will help unlock significant efficiency for our service providers in our core and emerging business, and that’s my answer. Thank you, Danny.

[Timothy Zhao:]

Thank you.

[Operator:]

Thank you. And our next question today comes from Xiaodan Zong with CICC. Please go ahead.

[Xiaodan Zhang:]

This is Xiaodan from CICC. Thanks, management for taking my questions, and congrats on another strong quarter. So my question is on the new home transaction services. As mentioned in the last quarter’s call, Beike plan to dynamically adjust the credit ranking of developers based on market conditions, which may in turn expand the addressable market. So could you please update us on the progress of that? Additionally, have you noticed any changes in the channel penetration rate, commission and split rate in the market? And what are the measures the company has taken in response to those market changes? Thank you.

[Stanley Peng:]

Beike is a company with a strategic focus. Regardless of market conditions, we know what to do and what not to do. And this is especially true for our new home business. Last year, we established a solid foundation for the safe operation and optimized business conduct of the new home transaction service industry. We have improved the service capability for the high-quality SOE developers. And in Q1, the proportion of the new home sales had increased to nearly 46%. Our cooperation with a larger number of SOE developers is also a validation of our ability to provide the high-quality service and our high sales efficiency. We have transformed the industry payment mechanism to protect the receivable security of the service providers. Projects with a commission in advance have higher sales efficiency than those without, which is a win-win situation for all parties involved. We have also established a safer working environment for both consumers and service providers. This is the right choice regardless of market environment. In this year, the overall market is experiencing moderate recovery. Strategic-wise, we will maintain consistent and stability without focusing on the short-term or being overly aggressive and blindly pursuing skill. We will focus on the better collaboration with upstream developers and further safeguard the interests of all of the service providers in Beike platform. And first, we have set minimum commission split with our channel partners to prevent the planned pursuit of profit, which would lead to a deterioration of downstream ecosystem. Second, we are strengthening the requirements of the reciprocal protection period, which extends our receivable requirements to ensure the equal protection of the agents and the developers. Third, the refined management, we are strengthening the management of the new home sales external Fangjianghu channel to achieve the tiered-management, further empowerment and to allocate the resources more efficiently to them. We also conduct the rating for the new home project in order to better organize and allocate our agents to accelerate the sales through of the high-quality listing, therefore improving the efficiency. And fourthly, we are enhancing our efforts in ecosystem governance with more than 5,000 cooperating new home projects implementing “private phone number protection services”, and more than 4,000 new home projects covered by a commitment from both the developers and the platform to transparent operations. Overall, with our four strategic initiatives and a stable market environment, we expect our new home business will achieve more win-win situation, greater safety, and a more dynamic growth in this year.

[Operator:]

Thank you. We’re approaching the end of the conference call. I will now turn the call over to your speaker host today, Miss Siting Li, for closing remarks.

[Siting Li:]

Thank you once again for joining us today. If you have any further questions, please feel free to contact Beike’s investor relations team through the contact information provided on our website. This concludes today’s call, and we look forward to speaking with you again next quarter. Thank you and goodbye.